Where Is The Money?

Some leftover business from my vacation. Last week I posted a chart from Paul Krugman showing that business investment was not lower than you'd expect given the state of the economy, and thus the notion that President Obama's anti-business policies were responsible for the lack of investment is bunk. Jonah Goldberg replied:

Yesterday, in a post titled “The Non-Existent Confidence Crisis,” Jonathan Chait poured scorn—largely borrowed from Paul Krugman—at any hint, suggestion, or argument that lack of business confidence in the economy has anything to do with our economic doldrums generally and the failure of businesses to invest and hire in particular. Ever the Keynesian, Chait asserts flatly: “Investment is lower because there’s not enough consumer demand. That’s the whole story.” The same day Politico ran a whole different story about how President Obama is desperate to shed his (well-deserved) anti-business reputation. ...

But wait a second! Don’t Obama’s political advisors know, thanks to Krugman and Chait, that lack of government-fueled demand is the “whole story”? And what are these blinkered businessmen thinking? Someone get them a subscription to the New Republic.

I must not have made my point clearly enough because Goldberg seems to have translated my post as arguing the exact opposite of what it did. I was not disputing the contention that "lack of business confidence in the economy has anything to do with our economic doldrums generally and the failure of businesses to invest and hire in particular." I was arguing that lack of business confidence in the economy has everything to do with our economic doldrums generally and the failure of businesses to invest and hire in particular. I was arguing that A is entirely the function of B, not that it's unrelated to B.

Let me explain this again. Suppose it were true that business is failing to invest not just because there's insufficient demand for its existing products but because business is frightened of Obama. To establish that such a thing was happening, you'd want to show that business investment was unusually low given the state of the economy. It isn't. Here's Krugman's chart:

Business investment is the red line. Capacity utilization is the blue line. Krugman pointed out that business investment generally rises or falls in tandem with capacity utilization. If business were failing to invest because of socialism fears, then the red line would be lower than it ought to be in relation to the blue line. In fact, it's higher than it ought to be in relation to the blue line. There's nothing to explain here: business investment is surprisingly high given the state of the economy.

Goldberg reads a great deal into a Politico story about the White House's attempt to woo business leaders and convince them that he's good for the economy. In Goldberg's mind, this demonstrates that the White House believes that fears of Obama's policies are causing a dearth of investment. I suppose it's possible that some members of the administration believe this, even though the evidence shows no sign of it. It's also possible that some members of the administration believe it might be true and there's no harm in taking steps to arrest a trend that may or may not be happening. But more likely, the White House is reassuring business because business is an important political constituency. I mean, hasn't that ever occurred to you, man?